By Nancy Crowder-McCoy and Stephanie Murray
Carr, Riggs & Ingram LLC
Now that we have the first tax filing year behind us after Congress passed the Tax Cuts and Jobs Act (TCJA), we can see that the legislation accomplished to some degree, the objective of simplifying the process for filing tax returns. For many of the American households the process of filing a return became simpler, but for many, the ability to itemize deductions disappeared.
This disappearing ability to itemize is the result of a near doubling of the standard deduction and the elimination or restriction of some of the itemized deductions. Some of these changes are discussed below:
Tax Cuts and Jobs Act
Taxes
Taxpayers can still deduct state and local income taxes, sales, and property taxes. However, this category of deduction is limited to $10,000 ($5,000 if married filing separately). This is a dramatic change for many taxpayers with ownership of multiple real properties or paying high state income taxes.
Charitable
Prior to the TCJA, charitable contributions to qualified organizations were generally deductible up to 50% of adjusted gross income (AGI). The TCJA increased the AGI limitation to 60%. The tax act also eliminated a charitable deduction for cash payments made to a college athletic department in exchange for athletic event tickets or seating rights.
Interest
Home mortgage interest deductions also took a “hair cut” under the TCJA. For loans originating on or before December 15, 2017, the taxpayer may deduct interest on up to $1 million in eligible debt ($500,000 if married filing separately). However, if the home mortgage was originated after December 15, 2017 then the debt limit becomes $750,000 ($375,000 if married filing separately). These limits apply to the combined amount of loans used to buy, build, or substantially improve the taxpayer’s main and second homes. In addition to the reduction in debt limit, home equity loan interest is no longer deductible unless the loan proceeds are used to buy, build, or substantially improve the main or second home.
Other Itemized Deductions
The TCJA suspended miscellaneous itemized deductions for tax years 2018 through 2025. These deductions were deductible to the extent they exceeded 2% of AGI. This includes tax preparation fees, investment expenses, hobby expenses and most unreimbursed employee expenses. The TJCA did not eliminate miscellaneous itemized deductions that were not subject to the 2% limitation, including gambling losses that are deductible to the extent of gambling winnings.
The TCJA also repealed the deduction for personal casualty and theft losses for tax years 2018 through 2025 except for those losses attributable to a federally declared disaster area.
Planning Opportunities
They still exist but the TCJA has made this more difficult.
“Bunching” of Itemized Deductions
This is the planning tool used when taxpayers do not have enough to itemize in any year. The strategy works by “bunching” two years of deductions in one year. This, in some cases, allows the taxpayer to itemize every other year. This strategy works with taxes (up to the $10,000 limit) and charitable contributions.
The New Qualified Business Income Deduction (QBI)
This deduction pertains to business, rental, and certain types of partnership and dividend income. There are multiple factors to this new 2018 deduction that allow for some degree of planning. For a business client, consider adjusting the W-2 wages to increase the deduction. Depending on circumstances, it might be beneficial to convert independent contractors to employees as long as the deduction benefit outweighs the increased payroll tax burden.
Mortgage Interest
For some taxpayers, it could be beneficial to pay-off mortgages, particularly if the taxpayer is no longer able to itemize deductions.
Qualified Charitable Distribution (QCD)
For individuals who are at least age 70 ½ and using the standard deduction, a QCD is an option. A QCD is a distribution made directly by an IRA custodian to certain qualified organizations. The QCD amount is excluded from taxable income while it counts towards satisfying an individual’s required minimum distribution (RMD) for the year. The total QCD for the year cannot exceed $100,000.
529 Plans
Under pre-TCJA law, withdrawals from 529 plans were tax-free only if used for qualified higher education costs. Taxpayers can now use up to $10,000 annually for kindergarten through 12th grade at public, private or religious institutions. Contributions to 529 plans qualify for the $15,000 annual gift tax exclusion per beneficiary. Taxpayers can elect to contribute up to $75,000 in one year and treat the contribution as made ratably over a five-year period.
Estate Tax Exemption
The TCJA doubled the estate and gift tax lifetime exemption to $11.4 million for 2019 and is indexed annually for inflation. Since the exemption will revert to $5 million in 2026 (or possibly sooner if changed by a new administration), taxpayers with sufficient wealth may want to take advantage of the increased exemption before it is too late.
Nancy Crowder-McCoy and Stephanie Murray are partners with the professional services firm Carr, Riggs & Ingram LLC, providing tax and estate planning services to high net worth individuals and families.